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Simple English definitions for legal terms
balloon payment
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A quick definition of balloon payment:
Balloon payment: A big payment that you have to make at the end of a short-term loan called a balloon loan. These loans are mostly used for businesses, but sometimes for personal loans too. The regular payments are small, but the balloon payment is very big, usually more than twice the regular payments. This can be dangerous because if the value of the thing you used as collateral (like a house) goes down, you might not be able to refinance the loan before the balloon payment is due. This can be a problem because the balloon payment is so big that you might not be able to afford it. Some people think that balloon loans are not fair because they let lenders give loans to people who can't really afford them. To make sure that people can afford the balloon payment, the government made new rules in 2008 that lenders have to follow.
A more thorough explanation:
Definition: Balloon payments are large payments due at the end of a short-term loan, called a balloon loan. These loans are often used in commercial settings and sometimes for personal loans. However, individuals rarely receive balloon loans because the balloon payment is usually more than twice the regular payments.
For example, let's say you take out a balloon loan for $10,000 with a fixed interest rate of 5% for a period of 3 years. Your regular payments would be around $304 per month. However, at the end of the 3 years, you would owe a balloon payment of around $7,000.
Balloon loans can be risky because the value of the collateral (such as a house or car) may drop after entering the loan. This can make it difficult to refinance the loan before the balloon payment is due because the collateral no longer supports the loan.
Regulators have questioned the use of balloon loans because they can allow creditors to give loans to debtors who cannot afford the final payment. In response, Regulation Z of the Truth in Lending Act was changed in 2008 to require creditors to ensure that the debtor has enough resources besides the collateral of the loan to repay or refinance the loan. However, creditors do not have to meet these new requirements for balloon loans with a period of 7 years or longer.